The costs of inaction are high, and they fall unevenly across countries. All countries will be affected, but it is clear that developing countries are the most vulnerable to the effects of climate change, and they are likely to suffer disproportionately.

According to a recent OECD study, 9 out of 10 of the must vulnerable port cities are in developing countries. Only one (Miami) is in an OECD country. Mumbai has the highest number of people exposed to coastal flooding today, and by 2070 we expect that Kolkata (Calcutta) would take over this unfortunate “leadership”.

But ambitious climate change policies are affordable. The forthcoming OECD Environmental Outlook shows that putting the world onto a pathway to stabilise greenhouse gases in the atmosphere at about 450 ppm CO2-equivalent would reduce GDP growth rates globally by an average of less than one-tenth of a percentage point (0.10%) per year from now to 2050. This seems affordable given expected growth in living standards and the various calculations of the cost of inaction.

To achieve this, however, least-cost policies need to be used. Both within countries and across countries. This means that most of the mitigation action will need to occur in developing countries. This is where the low cost options are.

Who should pay for this action is a separate question. The costs of action need to be distributed amongst countries in a fair and equitable way, and reflecting differentiated responsibilities and the ability to pay. Without the right burden sharing arrangements, we will not get a sufficient number of countries to join.

OECD is working on what shapes the incentives for different countries to participate in co-operative international action. In some cases, there are direct or indirect co-benefits of climate policies. For example, our recent analysis shows that achieving the ambitious climate target of 450 ppm would reduce air pollution significantly – sulphur dioxide emissions by 20-30% and nitrogen oxides by 30-40% by 2030.

All countries – but particularly developing countries -- will also need to build capacity to adapt to the impacts of inevitable climate changes already locked in due to past emissions.

OECD analysis has shown that a significant portion of ODA is directed at activities potentially affected by climate risk, for example investments in water supply and sanitation, or in transport infrastructure.

Our OECD Development Co-operation and Environment Ministers highlighted this last year, when they endorsed a Declaration on Integrating Climate Change Adaptation into Development Co-operation. We are working now to develop guidance on how to do this better.

Session 2: Policy Instruments for Addressing Climate Change

The policies needed to move towards a low-carbon economy are known and are available. This includes taxes, tradable emissions permits, incentives for climate-friendly innovation, standards (such as building codes) and regulations – all of these are well known. They can be combined in an effective policy “toolkit” to help to address climate change.

OECD analysis shows that mitigation policies should rely on market-based instruments as far as possible. That’s because they help to achieve both static and dynamic efficiency: static, in the sense that it will allocate mitigation wherever it is cheapest, and dynamic, in that it will provide incentives to invest in innovation.

Let me highlight three specific points on instruments:

Emission trading schemes are spreading among OECD countries. There is scope for learning about design features as we gain experience. How can we avoid unnecessary price volatility? How can we cover all gases and all sectors? How can we move towards auctioning of emission rights, rather than grandfathering?

Some countries are also applying carbon taxes. Our reviews show that these are not always effective. But this is because all too often the most energy intensive industries are exempted from these taxes or given preferential low tax rates. Sometimes this is for good reasons, but mostly for bad ones. The OECD-EEA [European Environment Agency] database on environment-related taxes lists over 1,150 such tax exemptions, and several hundred refund mechanisms and other tax provisions. These severely limit the effectiveness of the taxes, and they increase the costs of achieving any reduction in emissions.

Many countries also use subsidies to achieve greenhouse gas reductions. But in general subsidising the “good” of emission cuts is an inefficient way of spending tax-payers money. At the OECD we believe that it is better to tax the “bad” than subsidise the “good”.

Subsidising specific ways to cut emissions runs the risk of locking in technologies that may prove to be inefficient. New policies aimed at increasing the use of biofuels in OECD countries falls in this category. Our analysis shows that current biofuels production is generally not economically viable in these countries without significant subsidies, but the environmental benefits are uncertain and may be far smaller than anticipated.

Much of the current OECD analysis is focussed on addressing the challenges with the use of market instruments.

We stress the importance of providing a solid anchor for expectations of future prices of greenhouse gases – this is crucial for sound investments in long-lived physical capital and in innovation.

The right framework is needed to support innovation. This includes both credibility of IPR regimes, and ensuring the conditions to support technology transfer, without reducing incentives for innovation.

More generally, we are also looking at how to create greater coherence across the whole set of instruments. This is one of the challenges we face.

Session 3: Common Objectives on Climate Change Finance Issues

Most of the investment has to come from the private sector. We need to consider what it will take to bring this investment forward.

Let me emphasise a few key points:

The credibility of a sufficiently high carbon price in the future is crucial. With uncertainty, the option value of waiting to invest will go up, including in abatement. This is why a clear long-term policy signal is needed to both change behaviour and to give the business community the stable conditions to safely invest and to develop the necessary new technologies.

Recent analysis by our sister Organisation, the IEA, has illustrated the pernicious effects of uncertainty, in particular with respect to the necessary investments in clean energy and energy efficiency.

An enabling business environment allows enterprises to respond quickly and forcefully to the incentives created by a higher carbon price.

A solid economic footing is essential for the post-2012 framework. The OECD is working to achieve this, and is ready to reach out to other international organizations to join forces in such endeavour.